How fashion can accelerate supply chain decarbonization

Fashion brands can turn Scope 3 emissions risk into enterprise value by making supplier decarbonization investable.

In brief:

• The fashion industry’s biggest climate risk sits upstream – Scope 3 – where suppliers generate most emissions and face rising disruption.
• CFOs can make Scope 3 action investable by linking decarbonization to cost, risk, resilience and enterprise value.
• Shared data standards and collaborative finance can help brands, suppliers and financiers turn climate ambition into execution.

Fashion has a supply chain decarbonization problem – and treating it as a sustainability issue is precisely why progress has stalled. The main challenge sits upstream, where supplier activities generate approximately 80% of the industry’s emissions and where climate pressures are already disrupting material yields and production and driving costs. But effectively addressing these Scope 3 emissions is not a problem of science or ambition. It is a problem of incentives and capital.

Until the industry treats supply chain decarbonization as an investment decision – and not a voluntary commitment – necessary progress will remain out of reach. This reality opens the door to CFOs playing a central role. The white paper Accelerating Fashion Decarbonization, co-published by EY and H&M Group with insights from HSBC and Apparel Impact Institute (Aii), provides an in-depth analysis of the imperatives and opportunities of this approach.

In fashion, consumers rule – and climate issues are a priority for them. Two-thirds (66%) of European Gen Z and Millennial shoppers, for example, now say that they consider the planet when updating their wardrobe. Globally, 36% of the high spending, highly engaged luxury buyers who represent the core growth segment rank sustainability as a top purchasing consideration.

Now, downstream issues increasingly demand attention, as the agricultural supply chains on which fashion brands depend become disrupted by floods, droughts and similar climate-related impacts.

The science is alarming. According to recent research, changing weather patterns are likely to see yields for key crops such as cotton, hemp, flax and jute fall by up to 8% between now and 2050.¹ Such projections are materializing in the fields. Take the cotton fields of Mississippi, for example, where a 1^oC increase in maximum temperature between 1970 and 2020 has seen production drop by 6.1%.²

Climate risks don’t stop at the field’s edge, with extreme heat and flooding posing a threat to production operations and transport logistics. For major manufacturing hubs, both fashion’s main source of Scope 3 emissions and climate vulnerability, the economic costs could be crippling without necessary decarbonization, particularly in South and Southeast Asia.

The challenges of finding unity amid fragmentation

Large fashion brands are not standing still. Almost all of them have developed public commitments to balance (or, as a minimum, reduce) their carbon footprint. Leading brands have gone further, adopting additional targets for low-carbon materials, reducing embodied energy (total energy consumed throughout a product’s lifecycle) and similar climate-linked themes.

Yet despite such efforts, progress toward decarbonizing the fashion supply chain is slow. Indeed, it could even be going backward: Aii, a nonprofit organization which works with stakeholders across the apparel and textile industry to reduce carbon emissions, identifies in its most recent review a “stark rise” of 7.5% in the sector’s emissions between 2022 and 2023, driven mostly by a rise in virgin polyester use and overall growth in sales.⁴

The problem, in part, is structural. Brand owners may be the face of the industry, but emissions from their own operations are comparatively small (less than 5% of their total footprint). Instead, most (around 80%) occurs in the production of raw materials and manufacturing, both of which happen long before a garment arrives in their distribution centers.

The conclusion? For fashion brands to mitigate their climate risk and increase their long-term operational resilience, they first need to mobilize their suppliers to act.

Far less clear is how they should set about doing so. For starters, the fashion supply chain is highly fragmented, with suppliers typically selling to multiple buyers as well as sourcing from their own set of sub-suppliers. This limits the leverage that brands have over individual suppliers, while also restricting their ability to identify where their most significant climate impacts lie and thus where best to focus their decarbonization efforts.

Added to these challenges is the so-called free-rider dilemma, which sees other buyers getting credit for supplier emission reductions that another brand helped finance, driven by the fact that one brand often accounts for only a share of one factory’s production. This situation makes it more difficult to secure CFO sign-off on mitigation investments, such as financing rooftop solar panels or energy-efficient machinery for a supplier.

Making Scope 3 action investable and decision-grade

All these factors coalesce to complicate the creation of a robust internal business case for supply chain decarbonization.

Fortunately, in today’s world of growing system-level risks, short-term profitability is increasingly interpreted through a more balanced, less myopic lens than before. While delivering high returns on investment remains the priority for finance leaders, forward-looking CFOs also appreciate how issues like climate resilience can contribute to protecting and creating long-term enterprise value.

More concretely, there is a growing awareness among leading companies of the cost of inaction as a foundation for the supply chain decarbonization business case. Aii research indicates that climate risks have the potential to affect fashion brand bottom lines by up to 34% in 2030 and 67% by 2040.⁵

Fashion retailer H&M demonstrates how this logic can be applied in practice, enabled by collaboration on robust data and aligned KPIs, and internal investment roadmaps ultimately showing a clear business case. To get around the problem of supply chain fragmentation, H&M partnered with the independent Aii to leverage the organization’s extensive links with brands and suppliers. Together, they streamlined the data collection process by creating common standards for data reporting and carbon benchmarking.

H&M’s next step, informed by collaborative insights from Aii and HSBC, focused on linking its traditional financial KPIs more closely with its target sustainability outcomes.

Separately, H&M established internal programs, like the Green Fashion Initiative, to develop tailored return on investments goals for its various supplier-related decarbonization measures, aligned with sustainability standards.

Climate risk’s effect

With such measures in place, H&M was able to draw up a detailed investment roadmap, complete with the relative cost of each distinct intervention (expressed in USD per ton of carbon dioxide equivalent reduced). Equipped with this cost-to-returns information, the company had the essential rudiments for budget planning and business case evaluation.

This evaluation approach paved the way for the introduction of unit measurements for carbon intensity, enabling shorter-term performance tracking and improved comparability across projects.

Building the business case evaluation model on cost per ton and contribution as share of target played a crucial role in recasting decarbonization from being seen as a negative-value compliance cost to a source of future enterprise value.

Ultimately, the value of decarbonization becomes tangible over time – through lower volatility, more predictable costs and greater supply chain resilience. What appears as a cost in the short term increasingly functions as a hedge against future earnings erosion – turning climate exposure into a controllable financial variable rather than an unmanaged risk.

Converting individual effort into collective impact

Yet one major hurdle remains: the right type of financing at the right size to scale its impact. The issues at stake are size and the previously mentioned free-rider problem.

Conventional climate finance typically targets larger-scale projects than those conceived by H&M: more industrial wind farms or solar parks, say, than the kind of micro biomass plants or mini energy storage systems that a textile mill or clothing factory might require. And the free-rider problem requires joint financing of shared supply chains.

To resolve these dilemmas, leading-edge companies are looking to “blended finance” approaches pioneered in the international development sector, whereby capital is brought together from a mix of typically public, private and philanthropic sources. In the case of the fashion industry, HSBC has helped facilitate a similar approach: first, by linking financial institutions, insurers, manufacturers and numerous brands together to help identify common capital expenditure needs in real time; and, second, by bringing in multilateral development banks to provide a derisking function.

As efforts by fashion brands to reduce their Scope 3 emissions progress, other financing innovations are also coming to the fore. An illustrative case in point is the Deployment Gap Grant co-created by Aii, which issues suppliers with partial grants for decarbonization projects that can be paid back over four to six years. The initiative thereby avoids the twin bottlenecks of the slow payback times associated with rebates or the short windows typical of conventional market loans.

In today’s volatile and complex operating environments, fashion brands are far from alone in finding their long-term enterprise value under threat from supply-side risks. Nor are their suppliers unique in struggling to finance the low-carbon equipment and climate-smart operating systems that will reduce their carbon footprint. In developing innovative strategies based on active collaboration, robust financial management and flexible funding, the fashion industry provides a proven example of how individual effort can be converted into collective impact.

Key takeaways

• Establish alliances: Work closely with a trusted third-party organization that can act as a bridging partner between all the key actors across the supply chain.
• Precompetitive collaboration: Support information sharing, risk diversification and joint delivery platforms to deliver collectively beneficial solutions.
• Bring in the CFO: Engaging finance leaders in the conversation early on can play a pivotal role in linking impact with value creation, strengthening accountability and directing capital effectively.
• Rethink financing: Consider aggregated financing vehicles, risk-sharing mechanisms and sector-specific structures to circumvent the limitations of conventional finance instruments.

As fashion’s leaders – brands, suppliers and financiers alike – convene around the globe in coming months to pursue decarbonization, they should use these collaboration opportunities to align on shared data standards, scalable financing mechanisms and clear investment frameworks. Only then can supply chain decarbonization move from ambition to execution, and from cost center to a driver of long-term enterprise value.

With thanks to EY contributors to Accelerating Fashion Decarbonization:  Jon Copestake, Global Consumer Senior Analyst; Jan Henry Fosse, Partner, Strategy, EY-Parthenon; Malin Ahlberg Setterström, Manager, Sustainable Supply Chains; Christofer Cunningham, Manager, Consulting Business Transformation; Alenka Turnsek, Global Sustainability Tax Policy Leader; Gillian Lofts, Global Sustainable Finance Leader; and Nadia Woodhouse, Global Center for Board Matters and New Economy Unit Leader.

Summary

Fashion brands face growing exposure from emissions and climate disruption embedded deep in supplier networks. Because most impacts occur beyond their direct operations, progress depends on turning supplier transition from a sustainability aspiration into a financeable business opportunity. CFO involvement, reliable data, shared measurement and clearer investment cases can help connect decarbonization with supply chain resilience, cost control and long-term value. Examining the work of H&M, EY teams, Aii and HSBC, it is clear that collaboration, finance models and supplier-focused funding mechanisms can overcome fragmented supply chains and unlock practical action at scale.